Financial planner vs adviser: Know the difference!

There is a real confusion among investors over who a financial planner is and who an investment adviser is. These terms are used very loosely, so it is necessary that one understands the function of each of these professionals and approach the right people.

A few decades ago, there was confusion between what comprises sales and marketing. People thought they were very much the same. But it is to be understood that sales is just an important ingredient of the functions of marketing. Sales lies in persuading and convincing a person to buy a product that is suitable. Marketing involves all the activities right from the conception of the product, to branding, advertising and retailing.

It is an all-pervasive function from the product being ready to reach the market and ultimately being sold to the customer.

There prevails a similar confusion with who is an investment adviser and who is a financial planner. It is quite common to find these terms used interchangeably, but it is necessary to understand that an investment adviser and a financial planner have vast differences as between sales and marketing.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the director and chief financial planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

Why this confusion?

There is a real confusion among the investors regarding who a financial planner is and who is an investment adviser. These terms are used very loosely, so it is necessary that one understands the function of each of these professionals and approach the right people.

The main confusion in these terminologies arises out of a person's own perception. This arises due to most professionals offering financial services like insurance advisers, mutual fund distribution and stock brokers calling themselves financial planners.

This term has been used very loosely by many to suit their own convenience and image. This is more like a compounder professing to be a doctor, when he/she knows purely only about the medicine that one has to dispense. A compounder will not have the expertise to diagnose the disease that needs to be treated.

Who is a financial planner?

Financial planner is involved in planning all the finances of a person. His job includes drawing up an appropriate plan that covers all financial needs and goals in the short, medium and long run. Such a planner is like an architect of a building and helps to analyse and draw a complete map of how his or her client's finances need to be planned.

It includes considering the need for liquidity, cash management for various needs, goals planning and feasibility, long term cash flow, estate planning and risk management.

Who is an investment adviser?

In contrast an investment advisery/adviser is a person or group that helps her/his client decide on the financial products that s/he should invest in. Such an adviser understands what his or her client actually wants after communicating with them and understanding their need. An investment adviser makes a thorough analysis of the various securities before doing so.

Hence investment advisery is just one of the ingredients of financial planning.

Goal achievability

A financial planner will be able to tell you, is it possible to achieve all your financial dreams with your current and projected earning capacity. If it is not possible, then the financial planner will be able to tell you what could be achieved with your earning capacity and to achieve all your dreams what kind of earning capacity you should have.

Risk management plan

A financial plan also covers creating a risk management plan. A risk management plan includes creating an emergency reserve, assessing the human life value and suggesting a term insurance; identifying medical insurance cover required and suggesting a health insurance plan; and also suggesting a general insurance policy to cover the natural perils like fire, flood, earthquake... against your properties.

Investment plan

A financial plan that suggests investments comes only after all the aspects of a client's finances have been analysed fully. The best investment advice can only flow out after a deep analysis of a client's need and after the preparation of a financial plan.

Financial planning should always precede the investment planning.

Existing portfolio revamp

It is also necessary to understand that a financial planner also looks at past investments. He then makes necessary changes to make them amicable to achieve a client's financial goals over a period of time. Also s/he will assist you in restructuring your existing outstanding loans. If necessary s/he will create a debt pay-off plan too.

Tax planning

A financial planner should assist you in creating a tax plan also. This tax plan should be in sync with your overall financial plan.

Review

A financial planner will do a periodic review on your financial plan and investment plan. If you are advancing or postponing one of your goal or if you have got a job promotion, then you may need a financial plan review.

If direct tax code gets implemented (could happen in this year's Union Budget) or one of your investment schemes underperform, then you may need an investment review.

In a nutshell a financial planner will not only give you investment advice but also assist you in managing your personal finance in a complete, comprehensive and holistic way.